Your high interest rate private mortgage is coming due. Here are your options …

“I’d say in the last six or seven years, there’s been an absolute proliferation of private mortgage lenders and borrowers because the criteria to get a mortgage from a bank is much tighter now,” says Christopher Molder, principal broker at Toronto-based Tridac Mortgage. “So, it’s forcing more people into the private space.”

Private mortgages are designed to be short-term, typically ranging from six months to two years.

“The intended purpose of a private mortgage is that it is used as a bridge to convert borrowers to a more traditional mortgage,” says Daniel Vyner, principal broker at DV Capital. For instance, someone might need more time to re-establish or strengthen their credit rating.

Popular reasons for working with a private lender include more flexible terms and an easier application process, according a FSRA poll. That said, private mortgages come with risks.

“Interest rates on private mortgages are higher than bank rates, and renewals aren’t promised or guaranteed,” says Vyner. There are also renewal fees, which can range from one to three per cent of the loan amount.

So, what are your options after your private mortgage has matured?

In an ideal situation, Vyner says you would refinance to a traditional ‘A’ lender, such as a bank. But for homeowners who weren’t able to address income deficiencies or improve their credit profile, homeowners can look to nonbank financial institutions or a ‘B’ lender.

For homeowners who are unable to transition to an ‘A’ or ‘B’ lender, Vyner says that it’s important, ahead of maturity, to understand if your current private mortgage lender is offering a renewal, and if so, what the proposed terms and conditions are. Then, you can speak to your mortgage broker about various options, as renewing a private mortgage is not guaranteed.

Your ability to secure another private mortgage also depends on factors like where the property is located and your equity in it.

“The further outside of the city you go, lenders are less inclined to lend higher loan-to-value ratios if your home’s value has softened,” says Vyner. The danger you run into is that there may or may not even be another private lender who is able to provide a mortgage replacement. “And I’m seeing that quite often.”

Worst-case scenario? You’d need to list and sell your home.

“How I approach conversations with borrowers considering private financing is you should always be starting with the end goal, meaning their exit strategy,” says Molder.

Because private mortgages are a growing, yet niche, type of mortgage, Molder advises borrowers to speak to more than one broker and work with someone who’s doing a suitability assessment, especially given how challenging the lending market is.

“What matters most is the exit strategy,” says Molder. “If by providing this private mortgage, am I helping you move from point A to point B? Are we going to be successful in doing that? Or am I just borrowing from Peter to pay Paul? In which case, perhaps a private mortgage isn’t the right solution.”